Shekel Rallies to 16-Month High as Fischer Seen Holding Rates

Israel’s shekel rallied to the
highest level in 16 months as economists’ forecasts that the
central bank will refrain from cutting interest rates next week
spur demand for the currency.

The shekel strengthened as much as 0.5 percent to 3.6547 a
dollar, the highest level since Nov. 2011, before trading at
3.6593 at 4:43 p.m. in Tel Aviv. The currency gained 1.4 percent
this month, the second-best performer among an expanded list of
31 major currencies, according to data by Bloomberg.

The Bank of Israel will probably leave the benchmark
interest rate unchanged at 1.75 percent on Feb. 25 after three
cuts in 2012, according to 13 out of 18 economists surveyed by
Bloomberg, maintaining the interest rate gap with the U.S.
Central bank policies that took rates to record lows in the U.S.
and Europe are supporting the shekel, the bank said in minutes
of its last rate-setting meeting released Feb. 11.

“Shekel demand is high as the rate differential with the
U.S. is still attractive for investors,” said Eytan Admoni,
head of the international department at Bank of Jerusalem Ltd.
“Looking ahead rates are not expected to be eased further as
the central bank is concerned about rising housing prices.”

‘Near-Zero’

Governor Stanley Fischer said Feb. 13 that the central bank
is “going to have to watch” foreign inflows as near-zero
interest rates in the U.S. have spurred inflows into Israel
where borrowing costs are higher, driving gains in currencies.
The dollar’s 14-day relative-strength index against the shekel
fell to 31 today. Exceeding the threshold of 30 signals to some
investors that the greenback may reverse losses.

The Bank of Israel told lenders yesterday to set aside more
money against losses from home loans, as it seeks to shield the
financial system after house prices and credit surged in part by
expansionary monetary policy aimed at boosting growth.

One-year interest-rate swaps, an indicator of investor
expectations for rates over the period, fell one basis point to
1.64 percent, the lowest since Jan. 1. The yield on the
benchmark’s 4.25 percent bonds due in March 2023 declined two
basis points, or 0.02 percentage point to 4.02 percent.

The two-year break-even rate, the yield difference between
inflation-linked bonds and fixed-rate government debt of similar
maturity, was little changed at 213. That implies an average
annual inflation rate of 2.13 percent, within the governments 1
percent to 3 percent target range. The Tel Aviv Bond 40 Index,
which measures inflation- linked and fixed-rate corporate bonds,
increased for a third day, gaining 0.1 percent to 283.49.